What follows is a list of transportation companies with promising potential. I continue to be bullish on railroads and thus expect them to outperform airplanes and mail delivery service. In agreement with the Street, I prefer CSX Corp. (CSX) the most out of these three companies. All ratings are sourced from T1 Banker.
CSX is rated a "strong buy" and trades at a respective 13.3x and 10.5x past and forward earnings with a dividend yield of 2.2%.
Consensus estimates for CSX's EPS forecast that it will grow by 11.4% to $1.86 in 2012 and then by 14% and 15.1% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $2.08, the rough intrinsic value of the stock is $27.04, implying 21.5% upside. I am optimistic about the stability of export coal contracts and the efforts that management is taking to boost ROE. Fourth-quarter EPS of $0.43 may have been just short of consensus, but the company is well positioned to generate unusually high returns from a full recovery.
Southwest Airlines (LUV)
Southwest is rated a "buy' and trades at a respective 36.1x and 7.9x past and forward earnings with a dividend yield of 0.2%.
Consensus estimates for Southwest's EPS forecast that it will grow by 88.4% to $0.81 in 2012 and then by 30.9% and 3.8% in the following two years. Assuming a multiple of 9x and a conservative 2013 EPS of $1.04, the rough intrinsic value of the stock is $9.36, implying 12.6% upside. As I have stated earlier, I believe that the merger with AirTran will unlock synergistic value beyond what the market has acknowledged. Yes, airline mergers have been historically difficult due to labor costs, but Southwest has held up well while other competitors have gone bankrupt. It also has an investment grade rating, which mitigates risk for equity holders.
United Parcel Service (UPS)
United Parcel is rated a "buy" and trades at a respective 20.4x and 14.2x past and forward earnings with a dividend yield of 2.9%.
Consensus estimates for United Parcel's EPS forecast that it will grow by 14.4% to $4.84 in 2012 and then by 13.2% and 16.4% in the following two years. Assuming a multiple of 16x and a conservative 2013 EPS of $5.44, the rough intrinsic value of the stock is $87.04, implying 11% upside. The company only has one-tenth of the European market, which means significant room for penetration. The $200M European air hub project, which will improve capacity by ~70%, will help in this regard.
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